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Less than two months before the Rio Summer Olympics, Brazil’s hopes for an economic boost from the Games are evaporating as the country sinks deeper into its political, budgetary, and financial crisis. Efforts to line up commercial sponsors have been lagging, and ticket sales, even for the soccer final, have been sluggish, at least partly due to the zika virus outbreak, raising the specter of the Olympics costing the Brazilian economy as much as 0.7 percent of GDP. The latest psychological blow came this month, when the International Olympic Committee (IOC) advanced part of a payment of $1.5 billion due in August to meet Rio’s cash shortfall. The state’s deficit of 27 percent has already forced it to halt payments to a share of its public servants. *
Brazil can be proud that the Rio Olympics will be the first hosted in South America, but the Games are also first to take place in a country in a deep recession and political crisis—at least according to data compiled since 1964. As a result, the Olympics may not deliver another benefit identified in the literature on the impact of mega sports events: The “feel good factor,” or as authors Baade and Matheson (2016) put it, the benefit of civic pride. The authors have done extensive research on the economic effects of major sports events. Cariocas, as natives of the city of Rio de Janeiro are known, are having a tough time overcoming the ceaseless stream of discouraging news on these developments, leaving them no time to hail the Games. National newspapers have been dwelling more on Brazil’s difficulties than on the Olympics, and international press coverage has also mostly focused on the negatives.
Rio 2016, as the Olympic Games are known in Brazil, was originally listed as costing Brazil $13.7 billion, or 0.8 percent of its GDP. Because of the recession and budget difficulties, the Brazilian government, and the state and the municipal governments of Rio de Janeiro have cut their budgets to a combined total of $11 billion (just under 0.7 percent of GDP), slashing almost $3 billion from the original figure. As a consequence the planned expansion of Rio’s metro system and other major infrastructure projects have been postponed. This said, as Baade and Matheson (2016) document from the extensive literature on the effects of mega sports events, the median cost of such events are usually overrun by some 150 percent, or an additional $5 billion in the case of Rio 2016, were the event to follow the typical trend. Hence, the country might end up with a hefty bill yet, without the legacy to show for it. Typical cost overruns include not only extra infrastructure spending but also more-expensive-than-envisaged sports venues, as well as costlier logistics. As the experience with the 2014 World Cup has shown, new soccer stadiums turned out to be much costlier than originally thought.
Responsibilities for Rio 2016 are split among three entities: The Brazilian government, the Public Olympic Authority—a consortium formed by the federal government, the government of the state of Rio, and the municipal government—and the Organizing Committee based in the city of Rio. The Brazilian government is responsible for the construction of big infrastructure projects—roads, housing for participants, including athletes, the now temporarily defunct expansion of Rio’s metro—also known as “legacy infrastructure,” which will remain after the Games. These projects represent 64 percent of the total budget for the Games of $11 billion. The Public Olympic Authority is in charge of sports centers and venues (17 percent of the budget). The Organizing Committee handles ceremonies, technology, and logistics for the athletes (19 percent of the budget).
Organizers and the government have commissioned an economic impact study of the Olympics, prepared by the University of São Paulo. Although the assumptions of the study have not been made public, its conclusions, available on the Rio 2016 website, suggest that the overall economic gain for the economy from the Olympics could be as high as $30 billion, or close to 2 percent of GDP. It further calculates that for every dollar invested, $3.30 would be added to the economy by 2027. Additionally, says the study, over the next several years, state and municipal revenues could increase by $23 billion, with job creation resulting from spending on the Olympics totaling 120,000 annually by 2027.
Baade and Matheson (2016) cite a rule of thumb often used by economists who study mega events and their impact. They take whatever numbers the promoters are touting and move the decimal point one place to the left, meaning that estimates are often off by as much as ten times. For Brazil as a whole, that would mean an overall GDP impact of less than 0.2 percent, and job creation of no more than 12,000 annually, at best. Put differently, if costs follow the usual trend and turn out to be $16 billion rather than $11 billion, while the GDP impact conforms to the rule of thumb, hosting the Games will reduce GDP by 0.7 percent. On the revenue side, TV rights have delivered nearly half of total revenues from the Games, with the IOC sharing less than 30 percent with local organizing committees. Hence, the conclusion from the literature on mega sports events is that they are often a money-losing proposition for host cities.
This likelihood bodes terribly for Brazil and Rio, where the recession has driven up deficits. The overall national budget deficit for 2016 is expected to climb to 12 percent of GDP, and gross debt-to-GDP, already at 70 percent, may rise above 85 percent by the end of 2017. The state of Rio de Janeiro has recently missed two payments on its external obligations—one to French development bank ADP and the other to the Inter-American Development Bank. The state’s total debts have risen to 225 percent of net current revenues, above the 200 percent ceiling stipulated by Senate Resolution no. 40 of 2001, which sets strict limits on the ability of Brazilian states to run high debts. As of April 2016, the state’s deficit was 26 percent of net current revenues, among the largest in all of Brazil. The municipality of Rio is not faring any better. In addition to a deficit of 17 percent of net current revenues, its debt has risen more than 15 percentage points of net current revenues between June and December of 2015. At 68 percent of net current revenues, the municipality of Rio has the second highest debt ratio in the country, silver medalist to São Paulo’s gold medal.
Despite Brazil’s and Rio’s celebrated party-throwing credentials, Rio 2016 may well end up exposing the country’s and the city’s darkest weaknesses, while adding to their economic problems. President Dilma Rousseff’s motto in landing the Games was that Rio would host the “Olympics of all Olympics.” Winning the gold medal in red ink is probably not what she had in mind.
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* A previous version referred erroneously to the city, rather than the state of Rio de Janeiro.
